23 June 2014

Boris Krasnyansky’s interview to “Ukrainian News” Information Agency: “We have enough natural gas for this year”

Recently, Gazprom announced that its Board will consider liquidation of RosUkrEnergo. Being the second shareholder in this company through Centragas, what is your position on this issue? What will happen with RosUkrEnergo and why is it being closed down?


RUE has been inactive since 2009, and has had no income ever since. According to the Swiss legislation, a company has to be liquidated in such case. Gazprom, as one of its shareholders, takes the decision on its part. Respectively, Centragas will take a decision on its part. Obviously, Centragas will comply with the Swiss legislation.

Does this mean that you support liquidation of RUE?

Absolutely. There is nothing surprising in that.

How do you see the prospects of developing your chemicals business in light of the current dispute between Gazprom and Naftogaz? What price will be acceptable for your chemicals producers? Is there a possibility for you to buy gas not through Naftogaz? You have other traders besides RUE.

Our chemicals producers are supplied with natural gas by Ostchem Holding. Since 2009, RUE has not been buying or selling anything. After 2009, the chemicals business of Group DF has been consolidated, acquisition of natural gas was done through different channels, and RUE had nothing to do with it.

Was this done through Ostchem Holding?

Correct. Talking about the acceptable price, there are some reports that show that any price in excess of $200 creates problems in principle because of high levels of energy consumption of Ukraine’s industry. And we have been witnessing those problems since 2009, year after year. The question of which price is acceptable for us depends on a number of factors. Our fertilizer business is a lot more flexible because we can buy ammonia through the ammonia transportation pipeline from Russia. The price for ammonia is in a different segment, unlike natural gas. Ammonia is not needed by everyone. Do we look for alternative supplies? Absolutely. We look at every alternative to secure natural gas for our own needs. We have secured enough for this year. As of 1 June, we had over 4 billion cubic meters.

Is this gas intended exclusively for demands of your own chemicals producers, or it can be used for different purposes? For instance, to sell to third parties?

Theoretically, we could use it for different purposes. But we need it for our own needs.

What is the current situation with the Group’s producers in the Eastern Ukraine?

As you may know, we have closed down two of our producers. They account for a half of our production capacities, even more than that. And this has nothing to do with the gas price. We have shut them down because they are located in the military conflict zone. However, our current expectation is a political settlement of this crisis will be found, and that our producers will be able to resume operations. As of today, we had to discharge all ammonia from pipelines, and clear all stocks of dry finished products – because those are explosive products which could be misused in various ways. Our employees there are working on overhauls as much as it is possible in the current circumstances. They are only doing shifts during the daylight, unless security alert situations arise – in such case our employees are sent home. But despite all that, all of our employees continue to receive their salaries.

Have there been attempts of armed captures of your companies in the East of Ukraine?

No, there have only been some minor incidents. I wouldn’t call that an attempted armed capture.

How do your Crimean companies communicate with the current local authorities? As far as I know, the local authorities want the producers to pay taxes in the budget of Crimea, while Ukraine’s government sees things differently… There are issues with the jurisdiction and places of legal registration of your companies…

Unfortunately, I would like to ask the same questions to anyone who could resolve them. For the Ukrainian side, there has been a long delay in adopting the economical part of the law about occupied territories, in particular, its article #18. Some interim provisions should have been put in place, which would allow local business to operate on the occupied territory. We, as a business, need that our companies are able to operate. But as you know, the Ukrainian currency is no longer accepted in Crimea. And we have to pay salaries to our employees. For instance, we cannot pay salaries in the Russian currency at Crimea TITAN, which is registered as a Ukrainian legal entity in Kyiv. Our shareholder approached Prime Minister Arseniy Yatsenyuk with a letter asking for an advance permit to pay salaries in the Russian currency at a Ukrainian legal entity operating in Crimea from Kyiv. Of course this could have been included in the article #18, but the legislation has not been passed. So as a business, we have to solve a very difficult task. We are looking at all options to allow our companies to continue their operations. Otherwise we would simply have to shut them down.

Our shareholder Dmitry Firtash has always been very attentive to the questions of paying salaries and keeping people in their jobs. As a responsible employer, what should we do with the companies we own? Are we being put in a position when we are forced to sell? Are we being forced to change to the Russian jurisdiction? Are we being forced to come up with some ‘schemes’? Unfortunately, we do not have answers to many questions. Obviously, we are doing all we possibly can in every department…

Am I right to assume that Crimea TITAN is currently registered in Ukraine?

Yes, that is right.

And where is Crimean Soda Plant registered?

We decided not to register Crimean Soda Plant in Kyiv – it remained where it was. Whatever you do in the current circumstances, you place your bet without knowing what you will get in the end. There are too many unknowns and variables. There are variables with Russia, there are variables with Ukraine – like the article #18 we spoke about earlier… There are variables with the EU, as both of our Crimean producers export their products in various countries. So it is very important how their products of Crimean origin will be accepted internationally, outside of Ukraine and Russia. There are too many variables, so I will not go as far as explaining all the possible scenarios.

Businessman Vadim Novinsky has already admitted he might sell some of his business assets in Crimea. Are you also being forced to sell? Do you admit such a possibility?

We might be put in a position like that, of course. As a business Group with its roots in Ukraine, we will obviously comply with Ukraine’s legislation. So if the situation develops in such a way that we are unable to continue operations of our companies – we will have no other option but to sell.

Ukraine’s government has already announced that agreements covering the lease of state owned Irshanks and Volnogorsk mines are to be terminated. How will that impact your titanium business? How will that impact the towns of Irshansk and Volnogorsk? Group DF also owns two mining companies – the Mezhdurechensk and Valki Ilmenite mines. What is the share of Irshanks and Volnogorsk mines in the combined production output, and will you be able to supply your business with enough raw materials in the worst case scenario?

The shares are a complex question, because the deposits at those mines have been exhausted to various extents. I would like to clarify this situation. We were notified by the government in 3 months’ time before the termination of the agreement. This means that both mines remain under the control of Group DF’s titanium business until 5 September 2014. I’m convinced that this decision by the State Property Fund has not been though through enough. In the current economic climate in Ukraine, any stable and operating business should be cherished, or at least supported, but definitely not put in a position which complicates its operations. Frankly, this rather looks like an attempted redistribution of assets. I will remind you that around 7,000 people work at these two mines. These are city-forming industrial companies. We are not talking about restaurants or fashion boutiques, where if you change ownership, the new owner is instantly able to operate as efficiently as the old owner. To be able to operate efficiently, one has to understand this business, understand the markets. Another point is that you cannot simply replace one leaseholder with another, or find a buyer for such complex production assets in an instant. This may even end up in a shutdown of production.

Did the State Property Fund hold any negotiations with Group DF before taking such a decision?

It was managed not by the Group’s corporate centre, but by its titanium business. They were in contact with Ukrainian government and provided all requested information, including information about Group DF’s investments in the two mines. I am convinced that the decision to terminate the lease was wrong. We will attempt to persuade the government that the way those mines are being managed now by the current leaseholder is beneficial for the country.

Is there a possibility that this dispute will be taken to the court?

No, we are only talking about negotiations here. As the matter of fact, the state has the right terminate the lease. There is no question about that. But the question is who will benefit from such a decision? I don’t see a winner here, unless the company which eventually gets these mines is a strategic investor in the titanium business segment.

It is possible that the mines will be sold. If that is the case, will you take part in an auction?

Of course. Our position has not changed in that respect. We will take part in case a privatisation goes ahead, independently of whether we will lease the mines or not. Privatisation is something which requires a lengthy and thorough preparation process. Could this be done in a three months’ time? I seriously doubt that. You have to go through the preparation process, make a valuation, arrange an auction, sell it and hand it over to a new owner… It is especially complicated if you are selling to a non-resident company.

The two companies operating on Ukraine’s titanium market are Group DF and Avisma. Do you see Avisma as your competitor should the privatisation go ahead?

Avisma is a major Russian company. Of course we see them as our competition. Would they be interested is buying these two mines? I think they would.

In case you no longer control the two mines starting from September, will this change your approach to the titanium business as one of your core businesses?

Our answer is ‘No’. There are still two mining companies which we fully own. Those mines have very large and high concentration titanium deposits. Obviously, development of those deposits will require a rearrangement of investments. But our titanium programme included developing those deposits anyway.

So this may lead to reconsideration of investment programmes, or some additional investments?

Yes, but titanium business remains one of our core businesses in any case.

Are you still interested in acquiring Sumykhimprom? Have there been any developments with the State Property Fund?

Right, we repeatedly stated our interest in this asset, and also submitted documentation to participate in the recent trading which was cancelled by the State Property Fund. And we will take part in the future as well.

The President of Ukraine Petro Poroshenko announced that the Association Agreement with the EU shall be signed in the nearest future. Will this agreement be of benefit to the Group’s businesses, or will it harm them?

We have to make an assessment. If you disregard the political side of the Agreement, and only look at the economical side, then you cannot expect Ukraine’s industry to be an immediate winner. Even simple logic tells you that European integration it is a two-way traffic. It means that you open up your economy, your markets to European products, which will provide serious competition to Ukrainian products. On the other hand, those Ukrainian producers who are able to compete on European markets will enjoy considerable benefits. In any case, the first few years are going to be rather difficult, and this will be the case for all sectors of Ukraine’s economy. But we knew that from the very beginning. I’m not ready to discuss concrete numbers and how each one of our businesses will benefit or not. But we definitely shouldn’t expect quick wins.

And what about the longer-term perspective?

In the longer term, the common logic tells you that companies able to compete in the European market will be the winners. On the other hand, weak businesses unable to make large investments will be the losers. It is important to understand that. The question is whether it will be possible to attract investments. Will businesses be able to attract money to invest? In my view, there has been lack of information about the real consequences of signing the economic part of the Association Agreement. But again, we are not talking about the political side of the matter here, and it is difficult to say whether the political side or the economic side is the most important one.

It is all interconnected.

It definitely is.

But if we look at the level of Group DF’s representation on European markets, the Association with the EU may bring significant benefits, right?

Of course. Our fertiliser business exports to Europe, as well as our titanium and soda ash businesses. In fact, our global titanium dioxide market cap is 2%. So we seriously depend on exports.

Earlier, Group DF announced the intentions of its businesses to attract investments at foreign capital markets. Considering the current economic climate in Ukraine, are those plans still in place in the medium-term perspective? Which one of the Group’s businesses is more prepared for that?

Our fertiliser businesses is perhaps the most prepared one, but it depends on which time frames we are talking about. For instance, it is easier to prepare our titanium business due its lesser complexity. So it all depends on the time frames. But you see, it is not only the question of Group DF, but the question of Ukraine in general. It depends on when Ukrainian businesses will become attractive to foreign investors in general. I don’t think we should expect that to happen in the short term perspective.

The key questions here are how successfully Ukraine’s government will implement the programme of transformations it has undertaken, how international creditors will work with Ukraine, and how the critical situation with Russia will be resolved. There are major doubts over all of that. You see, despite all the support from the West, if the situation with Russia is not resolved positively Ukraine will remain a highly risky investment destination. And this will be the case for every Ukrainian business. So it is difficult to talk about concrete time frames.

But do international financial markets remain a strategic priority for the Group?

Without doubt. Nothing has changed here. Moreover, the recent Group Supervisory Council meeting chaired by Dmitry Firtash confirmed that Group DF remains committed to building an open and transparent business. It is not critical if the preparation for entering international financial markets takes a few more years – we will have more practice time.

Have your investment plans been revised due to the difficult political situation?

Not yet.

Has the combined amount of the planned investments changed?

No, it remains the same. We never publicized those figures. But there might be some changes now due to the issue with leasing the two mines from the state. We planned that our titanium programme would require $2.5 billion of investments, but this will depend on what our titanium business will include. We need to know which assets will be consolidated in it.

How has the situation with the Group’s shareholder in Austria affected Group DF’s activities? What changes have been done to the management structure?

The management structure did not change much. Dmitry Firtash used to spend a lot of time abroad before. In 2013, only one of seven Group Supervisory Council meetings, which are chaired by Mr Firtash, took place in Ukraine. So this has often been the case before, and there is nothing strange in that such meetings are held abroad. So nothing really changed in that respect. Mr Firtash’s involvement in the management of the Group’s businesses has remained at the same level as before. There have been teleconferences with our fertilizer producers, with Nadra Bank. Our shareholder communicates over the phone just as he did before. He also meets heads of Group DF’s businesses in Vienna rather frequently. As you see, things have not changed much.

Has this situation affected the Group as a whole?

It has. It would of course be very welcome if Mr Firtash was able to contribute to the Group’s management on a daily basis and visit our production companies in person – something he used to do before on a regular basis. When he was in Ukraine, such meetings could take place at any moment of time.

What do you see as an important precondition to revitalising Ukraine’s economy and attracting foreign investments? What kind of an advice would you give to Arseniy Yatsenyuk, the Prime Minster of Ukraine?

You know, it is very easy to give advices, but very difficult to implement them. I can only say what should be achieved, but I cannot say how that should be achieved. I believe that without normalising the situation with Russia it will be very difficult to overcome negative developments in Ukraine’s economy. In the interests of our economy, I would also make sure not to take radical actions towards redistribution of property. This is not right, and it sends the wrong signals.

What should the government do then?

It should provide maximum support to operating businesses. Supporting them does not necessary mean helping them, but rather not standing in their way. This should be the case irrespectively of who is in power. I believe that today the government does the right thing by securing international financial assistance, even though the reforms it implements may be unpopular. But those reforms are vital.

How the government should revise the system of taxing businesses?

The ideal situation is when the taxation system stays the same. This is the main recipe – do not change anything during a long period of time. This is point number one. The second point is to stop the malicious policies of taking advance tax payments and delaying the VAT refunds. The government has to think about giving businesses the sense of comfort and confidence, rather than thinking about ways of filling in the budget as quickly as they can. This is the only way of securing budget income in the medium and longer term.

No business means no budget income.

You are absolutely right. This has been the mistake of the previous government.

We often hear about a fair price of the U.S. dollar. In your opinion, what is the current fair USD to UAH exchange rate? And which exchange rate is forecasted in your business plans?

I believe there is no such thing as a ‘fair exchange rate’.

In theory, a fair exchange rate should be determined by the market.

Exactly. Therefore it is incorrect to say which exchange rate is fair and which is not. If the market determines the exchange rate at 8/1 then it is a fair exchange rate. If the market determines it at 15/1 – it is also a fair exchange rate. So only the currency market determines which exchange rate is the fair one. That is why international financial organisations, such as the IMF, have always pressured Ukraine’s financial regulator to let the exchange rate flow and be determined by the market. At what rate will it stabilise? You can only guess. It is like a casino, where you try to guess where to place your bet.

But you still have to place your bet somewhere and make your forecasts, don’t you?

The question of where do we place our bet is our internal matter, and this does not mean that is the fair exchange rate. We make our own forecasts about the level at which the rate may stabilise, but I do categorically not agree with the concept of the ‘fair’ rate, you see? It is like a question about a fair price of a certain asset. The fair price is always the price of the deal. The fair exchange rate is the current rate. People constantly talk about the fair rate because they do not understand it. ‘Oh, 15/1 is wrong! It is too much!’ Or is it too little? Why not 30/1? The RUB to USD exchange rate is some 30/1 or 40/1.

Could you name the exchange rate that you use in your business plans?

I can tell you that each of our businesses forecasts its own exchange rate. And I don’t see anything bad in that.

What is your assessment of the policies being implemented by the National Bank of Ukraine? How may valuations of Ukrainian banks change? I’m asking this because of your plans to acquire Pravex Bank.

Currently, the regulator implements the right policies in all respects. This includes the refinancing of banks, holding the stress-tests, and in terms of the Ukrainian currency devaluation. I am convinced that all these things which the National Bank of Ukraine does are absolutely competent and necessary.

Talking about valuations of Ukrainian banks, first of all, we should talk about where valuations come from. The question is whether Ukrainian banks are in demand now, and how will this demand evolve? Perhaps you have heard that Raiffeisen Bank Aval was going to be sold, but they changed their mind later. They did that because there is no demand currently. I believe that valuations of Ukrainian banks will continue to go down for some more time. A change of this situation and future growth may only come following stabilisation of the economy and inflow of deposits.